I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Warren Buffett's Very Strange Tax Argument

Update: there is a further post on this subject here. If Warren Buffett isn’t really paying the corporate income tax then we should perhaps abolish the corporate income tax.

Warren Buffett’s got a piece in the New York Times today. A piece in which he makes a very strange claim about the rate of tax that he pays.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

There are essentially two conceptual ways in which you can tax dividends. You can tax them as income to the people who collect them: this was the system in the UK, my home country and is effectively the system now. Or you can tax the profits at the corporate level and then dividends are tax free to the recipients. Several continental European countries use this system.

The United States is different: it has elements of both systems. First, corporate profits are subject to the corporate profits tax, some 35% currently as the headline rate. Then dividends are taxed again in the hands of the recipients at the rate of 15%. This means that the effective tax rate on Buffett’s dividends from Berkshire Hathaway was not the 15% that he’s using in his calculation above (the 2.4% to take the total to 17.4% is presumably referring to the capped social security taxes and the income tax on his salary, not dividends).

Assume there’s $100 of profit which is to be paid in dividends under each of the systems.

In the UK dividends are paid out of post tax profit, as in the US. However, that tax that had been paid on the corporate profits becomes, to the dividend recipient, a tax credit. If you are a lower rate taxpayer no further tax is due on the dividends received. Only if you are a higher rate taxpayer do you pay tax on the dividends taking your tax rate up to the same as it would be from any other income. So if corporation tax is 28%, your tax rate on your dividends is 28%, already paid at the company level. Or if you’re in the higher bands, 40 or 50%, just as with any other income (and yes it does get very much more complex but this is good enough) and made up of your paying further income tax on your received dividends.

There are tax systems where there is no tax on dividends at all: a higher corporate tax rate being used instead.

So in the UK system from $100 of profits that are to be paid as dividends the tax rate is 28% (the current corporate income tax rate), or $28, if you are a lower rate taxpayer or $40 ($28 at the company level, another $12 individually, at the very top, another $22) if you are a higher rate taxpayer. Tax rates of 28% or 40% or 50%, very similar to other income sources.

In the US system from our $100 first we take $35 at the corporate level. Then we take another $15, or the dividend tax rate of 15%, from the recipient. Giving us a tax rate of 50% on dividends. We’ve taken $50 from the total amount that was to be used to pay dividends.

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Strange Tax argument? Nothing strange. Buffett appears to be one of the few honest super rich people. Others claim they “control the money supply of this great empire upon which the sun never sets” and therefore THEY control the empire. And Buffett is correct. His rate is lower than that of almost anyone working stiff I know!!!

Horribly, utterly, false, even if the author’s corporate tax rate argument were totally invalid. To quote another of my replies:

Try looking up the effective tax rates for the various income percentage levels available from the IRS. Buffet may pay a lower effective rate than some of his very high paid employees (because he’s only paying on capital gains and dividends) but he pays a much higher rate than anyone in the “middle class”. Those earning from the 75% percentile to the 90% percentile of income paid an effective rate of just 9.29% in 2008. (2008 is the latest year fully summarized so far.) Everyone below that paid an even lower rate.

The bottom line being that WB’s comment about how he pays less than the middle class is BS, and you don’t need to include the corporate tax rate to see that.

Boy this is terrible analysis. As others have noted, Berkshire Hathaway offers no dividend (no income there), and Buffett maintains that he has never sold a single share (no capital gains there). But presumably there are dividends and/or capital gains elsewhere, and Buffett surely has a prodigioius income.

But the author errs mightily by saying “corporations pay 35% tax” because that’s a joke. Get all your income this year from GE and you’ll find that GE paid NO taxes at all. While 35% may be the published top end rate, almost no corporation pays that – or in most cases, anything close. They use a variety of deductions, loopholes, income shifting and other techniques to make income disappear.

The ‘basic argument’ doesn’t still stand; not close. Buffett says the progressivity of the tax system doesn’t exist for billionaires, and he’s right. The author, too clever by half, tries to pretend he’s wrong, but it’s the author who needs a lesson, not Buffett.

$100 profit at the corporate level – 35% for the corporate income tax leaves $65. When that comes to the individual, that $65 is taxed at 15%, which means the resultant tax is $9.75, for a total tax of $44.75, not $50.

Tim your article is a ridiculously, rambling argument that seems to completely ignore the point of Buffett’s original statement.

His point is that the highest income earners in this country pay less tax (as a percentage) then the middle class. The argument that we need to give those champions of industry a break so that they’ll generate US jobs is completely flawed. Most corporations today are creating those new jobs in off shore markets because that’s what maximizes profits.

It is sarcastic, ignorant, and stating the obvious that we can all donate money to the US Government. When you provide that as a solution to Buffett’s proposal, you are advocating a volunteer tax system. I’d hope you’d understand that a volunteer tax system is far from a practical working model.

Anyone who has read anything about Buffett knows the man is rational. I think the reason you find Buffett’s ideas as strange is because you don’t appreciate that he is advocating a tax policy. You can argue points about the corporate tax, but it doesn’t change his underlying point that he simply believes the rich should be taxed MORE.

Tim, thank you for being such a glaring representative of one of the most insidious and damaging problems with the media. A complete lack of respect for objectivity, and a complete failure to appreciate the damage you cause by spreading false information. You make an C student 8th grader glaring error (that just so happens to be in the interest of supporting your argument), and yet you and Forbes bury the correction! Make the correction on the first page of the article!

Secondly, you argue your position by exploring just as much complexity as will support your argument, and either are ignorant of or ignore any additional complexity which would undermine your argument. You completely ignore the incredible amount of options that corporations exercise in order to reduce their tax bills, the fact that often dividends are not declared which allows the corps to reinvest and expand over the long term with money that has only been modestly taxed (compared to top marginal rates), and the benefits that a person gets by having a corporate shield for their business endeavors.

Third, your argument is based on complete assumption rather taking the time to find out the details of the Buffet income tax argument. You just invent what you think it might be and argue against it.

Forbes! Please choose your writers and commentators better! Or at least train them in the fundamental principles of journalism. And maybe some 8th grade math would be nice too . . .

Shove it Tim, most countries (European and not) have the system of taxing both corporate profits and dividends. Stop making claims that have nothing to do with reality and start using real data. And let’s not forget to mention that corporate taxes make up only about 5% of all tax collected in the US. Check out the loopholes you greedy morons. Here are the facts: http://www.nytimes.com/201​1/02/02/business/economy/0​2leonhardt.html